What Is Personal Guarantee Insurance for Business Loans?
How Small Business Owners Can Protect Their Personal Assets
UPDATE: At this time (2017), I have not been able to find anyone who sells personal guarantee insurance.
Many small businesses need financing in the form of business loans to get started or to expand. For startup loans, in particular, the business owner often must provide the lender with some type of collateral and a guarantee of repayment if the business defaults on the loan. Since a new business often has little collateral and little to no income to guarantee the loan, the business owner is often required to provide a personal guarantee. A personal guarantee is signed by the business owner pledging personal assets in the event of business default; that is, the owner's assets may need to be sold to pay off a business loan.
How Small Business Owners Can Protect Personal Assets
New business owners are often concerned about the loss of personal assets if their business fails to pay its bills or loans. But there is a new solution to keep personal assets out of the picture in the event of a business bankruptcy or default; this new solution is called "personal guarantee insurance."
What Is Personal Guarantee Insurance?
Personal Guarantee Insurance (PGI) is a new insurance product created to provide small-to-medium-sized business owners and commercial real estate investors protection for personal assets when they sign a personal guarantee for a commercial loan.
Personal guarantees have long been a fact of life for business owners seeking a commercial loan but this doesn’t lessen the risk associated with signing them. By doing so, the signer (known also as a guarantor) is responsible for satisfying the terms of the loan in the event of the business’ liquidation. This puts the guarantor’s personal assets (such as home, car, college accounts, retirement accounts, etc.) at risk. PGI is designed to protect the guarantor’s personal assets in such a situation.
If, after liquidating the business assets, the lender seeks personal assets to repay the balance of the loan, PGI will cover up to 70% of the insured’s net liability, depending on the coverage purchased and the terms of the policy.
By covering up to 70% of the guarantor’s net liability, PGI provides the insured with a safety net without eliminating the motivation to overcome difficulties and restore the health of the business.
Who Pays the PGI Premium?
PGI is an annual policy, with a premium based on the size of the loan and the risk characteristics of the underlying business. The borrower/guarantor purchases the insurance to protect their personal assets. The insurance is available to the business owner(s)/guarantor(s) as they have committed to a personal guarantee associated with a commercial loan. Coverage is generally only available for a limited time after the loan closing.
PGI is an annual policy, with a premium based on the size of the loan guarantee and the risk characteristics of the underlying business and loan transaction. With the answers to a few questions, a preliminary quote can be provided. The cost starts at less than 1% of the total amount of the guarantee.
Who Does PGI Really Protect?
PGI is designed to protect the borrower’s personal assets when signing a personal guarantee. However, coverage benefits may be assigned and many lenders view a purchase of a PGI policy positively as it provides additional value to the guarantee and reinforces the existing collateral on the business loan.
The Limits of Personal Guarantee Insurance
Coverage amounts are available between 30% and 70% of the stated value of a personal guarantee, at the discretion of the guarantor(s), up to a policy limit of $2.5 million. Coverage is available for most commercial and industrial loans (e.g., lines of credit, demand loans, term loans, commercial real estate, term facilities and commercial mortgages) and, on a very limited basis, construction and development loans. Loans must be secured loan transactions.Coverage is also available for government guaranteed loans like Small Business Administration (SBA) loans.
But coverage is not available for unsecured loan transactions or highly speculative projects.
The typical company profile of a customer is a small-to-medium-sized business, generally with revenues between $5 million and $100 million, or a commercial real estate property with value between $750,000 and $10 million. The business has a consistent performance record with a minimum of five years of operating experience and three years of credit history or principals with an equivalent track record in the industry.
How PGI Works When a Business Defaults on a Loan
In the case of a loan default, the insured(s) must notify the insurance company that issued the policy. A claims manager will be assigned to help the insured guarantors understand the circumstances, what the default means, and how to work through to a claim.
More About Mark Ricciardelli
Mark L. Ricciardelli is Executive Director and Chief Executive Officer, and Co-Founder of Asterisk Financial.